ECONOMICS: Microeconomics Flashcards
basic economic concepts
a. economics: addresses the production, exchange, and consumption of goods and services
b. 4 central ideas of economics:
> people can make rational choices by comparing costs and benefits
> opportunity cost is something you’re willing to give up for the “best” thing
> benefits are what you gain when you get something and are measured by what you’re willing to give up to get them. (EX. buying a cup of coffee- benefits may include the taste, boost of energy, conversation w/ the barista, etc.) later purchases will cause decrease in benefits
> incentives influence choices. EX. a cafe offers a free muffin if you buy a large coffee instead of a medium one
basic economic concepts: high utility, comparative advantage, economic efficiency, specialization
a. goods and services that provide consumers great satisfaction means the goods have high utility
b. the supplier who can produce a good or provide at a lower opportunity cost than anyone else has a comparative advantage
c. to gain a comparative advantage, businesses can:
- maximize their use of resources = economic efficiency
- concentrate on producing only one thing = specialization
d. specialization of labor is when each worker engages in only one task and the result is greater efficiency and higher productivity
basic economic concepts: elasticity, economy of scale, and law of diminishing returns
a. the measure of how a change in one variable in the economic equation (labor, capital, price per unit) relates to changes in one of the other variables is known as elasticity
- EX. when a business is performing efficiently, they expand- opening a second shop and hiring more workers
b. if the increase in capital and labor (the shop and workers) leads to a greater increase in output, the per unit cost to make one good is reduced and the business owner experienced an economy of scale
C. at that point, the business may want to keep expanding, but at some point they will have to face the law of diminishing returns (the cost to expand will be greater than the productivity gained)
- the owner has more stores and workers but is producing a fewer goods at a higher per-unit cost
primary economic systems
a. market economy: private businesses operate to increase their individual profit, and the prices of goods and services are determined by individual business owners based on supply of resources and consumer demand
b. traditional economy: economic decisions are based on established patterns of behavior. resources are allocated based on custom, and production primarily involves survival needs. they work best in small societies w/ few resources and unchanging needs
c. command economy: some central authority or gov controls production and other economic decisions such as the price of goods, wages, and distribution of wealth
☆ many countries have mixed economies - the US is a market-based system
factors of production
a. land, includes all natural resources (i.e. soils, minerals, farmland, forests, rivers, etc.). land is necessary for production, but by itself it is passive– humans must act on land to produce goods
b. labor, the muscle power and skills required to produce goods and services. labor can also include intelligence and applied knowledge (human capital). businesses invest in human capital to further productivity
c. capital, includes products that have already been produced and are used to make other products: tools and machines
d. entrepreneurship is also involved as a factor - the entrepreneur takes on the risks of business and has the greatest potential benefit
the law of supply and demand and factors that affect supply and demand
a. law of supply: supply rises and declines along w/ price, if all other factors remain the same
b. law of demand: if all other factors remain the same, price and demand are inversely related
- in other words, demand decreases when price goes up and increases when prices go down
c. factors that affect supply and demand:
- demand goes down if there are substitutes
- social circumstances and tastes change (what’s trending)
- changes in household income, in the price of resources, and increased production efficiency
economic systems: monopolies and perfectly competitive market
a. monopolies: when one supplier has a product that has no close substitute
- new suppliers are blocked from entering production due to limited availability of resources (i.e. oil) or proprietary technology
- gov regulation leads to a monopoly
- the single supplies determines prices, generally the max the consumer is willing to pay
b. perfectly competitive market: has many suppliers producing identical products and suppliers can freely exit or enter from the market
- EX. in this market, buyers and sellers are all aware of the price and quality of the product. if a new company prices its good below an identical good of a well-known brand, that brand and other competitors can drop their prices to match → buyers get the lowest possible price, and sellers make a fair profit
economic systems: monopolistic competition and oligopolies
a. monopolistic competition: each supplier effectively has a monopoly on its own, but the products are similar enough that buyers can choose among them. suppliers set the price for their own products based on demand
b. oligopolies: several suppliers compete for consumer attention - barriers prevent other suppliers from entering the market. w/ only a few suppliers, competition is limited, so changes in price by one supplier have a main effect on the overall market
types of business ownership
a. sole proprietorship: one individual owns the whole business. the sole proprietor takes on all responsibilities for management, production, and expenses, and they keep all the profit (EX. dry cleaners)
- best suited for smaller businesses; as they grow, it can be difficult for one person to manage debt, resources, and demand
b. partnership: ownership is shared between 2 or more people. income and responsibilities are slim and decisions are negotiated between the the party
c. corporation: owned by many people, but the corporation itself functions like a single individual independent from its owners.
- owners are stockholders who invest $$ to run the business but don’t take part in day-to-day business decisions and aren’t responsible for business debt
- profits are distributed to shareholders as dividends, based on the initial investment
considerations a business owner has to address when opening a business:
a. costs: can be explicit (i.e. expenditures on factors of production) or implicit (i.e. costs associated w/ entrepreneurship). maximizing profit generally requires minimizing costs
b. time frame: some decisions affect production in the short run, whereas others affect it in the long run
c. advances in technology: new technology can increase costs associated w/ production in the short run but reduce costs in long run
d. law of diminishing returns
e. marketing, advertising, and branding
consumer economics
a. an area of study that focuses on consumer practices and responsibilities within an economy
b. can also include how individuals choose to save $$ and other areas of personal finance
c. includes practices and regulations that protect consumers and factors that influence decisions
factors that influence consumers:
a. others attitudes and opinions
b. published research
c. cost
d. warranties, service contracts, and other consumer protections
consumer protection laws:
a. nutrition labeling and education act: specifies how food can be labeled and advertised
b. equal credit opportunity act: prohibits discrimination in decisions to extend credit and allows people to review their credit reports
c. truth in savings act: requires disclosure of fees and interest rates on loans and other interest-bearing accounts
d. child safety protection act: specifies warning on toys and other products for use by children
e. magnuson-moss warranty act: requires manufacturers to provide detailed info about a product’s warranties
- these laws are enforced by federal agencies
personal finance
a. refers to economic decisions made by individuals or households - key element of personal finance is budgeting
b. developing a budget requires computing income and expenses and distributing portions of income to meet each expense, w/ fixed expenses (i.e. rent) and variable expenses
c. many allocation a portion of income for savings, so their financial planning involves making choices about what sorts of investments to make
bank loans, installment credit, and credit cards
a. bank loans: the bank provides a sum of money which the consumer pays back in an agreed-upon time frame. interest is added on the balance of the loan until its paid off
b. installment credit: a form of loan used to finance cars and other high-cost goods. each month, the consumer pays a fixed amt, which includes payment toward the balance of the loan + interest on the unpaid balance
c. credit cards
